Olivier Guéant

The Behavior of Dealers and Clients on the European Corporate
Bond Market: the Case of Multi-Dealer-to-Client Platforms

Abstract :

For the last two decades, most financial markets have undergone an evolution toward electronification. The market for corporate bonds is one of the last major financial markets to follow this unavoidable path. Traditionally quote-driven (i.e., dealer-driven) rather than order-driven, the market for corporate bonds is still mainly dominated by voice trading, but a lot of electronic platforms have emerged. These electronic platforms make it possible for buy-side agents to simultaneously request several dealers for quotes, or even directly trade with other buy-siders. The research presented in this talk is based on a large proprietary database of requests for quotes (RFQ) sent, through the multi-dealer-to-client (MD2C) platform operated by Bloomberg Fixed Income Trading, to one of the major liquidity providers in European corporate bonds. Our goal is (i) to model the RFQ process on these platforms and the resulting competition between dealers, and (ii) to use our model in order to implicit from the RFQ database the behavior of both dealers and clients on MD2C platforms.

Market makers provide liquidity to other market participants: they propose prices at which they stand ready to buy and sell a wide variety of assets. They face a complex optimization problem with both static and dynamic components. They need indeed to propose bid and oﬀer/ask prices in an optimal way for making money out of the diﬀerence between these two prices (their bid-ask spread). Since they seldom buy and sell simultaneously, and therefore hold long or short inventories, they also need to mitigate the risk associated with price changes, and subsequently skew their quotes dynamically. In this paper, (i) we propose a general modeling framework which generalizes (and reconciles)thevariousmodelingapproachesproposedintheliteraturesincethepublication of the seminal paper “High-frequency trading in a limit order book” by Avellaneda and Stoikov, (ii) we prove new general results on the existence and the characterization of optimal market making strategies, (iii) we obtain new closed-form approximations for the optimal quotes, (iv) we extend the modeling framework to the case of multi-asset market making, and (v) we show how the model can be used in practice in the speciﬁc (and original) case of two credit indices.

Organized by Dominique Guégan, University of Paris 1 (Bio & CV) and LabEx ReFi head of the FinTech research Group Risks and fintech (CO738) Location: Senate House, University of London Forecasting inflection points: Hybrid methods with machine[...]